rw fdi chapter 07

7/25/2019 RW FDI Chapter 07

1/50

Foreign Direct Investment

Chapter 7


2/50

7 - 2

McGraw-Hill/IrwinInternational Business, 6/e, 7e

Portions 2007-2009 The McGraw-Hill Co !anies,Inc", #ll $i%hts $eser&e'"

Extra credit opportunity

Presentations on- a country or- a region (even a town/city in U.S.)- some other subject in global business

n especially goo! chance to !iscuss your home oryour ancestors" home


3/50

7 - 3



#ength $- % to &' minutes (in!ivi!ual)- Up to & minutes (group)


4/50


5/50

7 - 5



- he political environment *ow is the country/region governe!+


6/50

7 - 6



- Something o2 the cultural environment You cant summarize the culture; just say one or two things that strike

you as important - he country or region"s role in glo al usiness

,hat !oes the country or region produce +

*ow important is it to people elsewhere+ Can you tell what is li3ely to happen in the

2uture+


7/50

7 - 7




8/50

7 - !



"#at is $oreign direct investment %

n indirect investment is one where the investor!oes not gain control o2 the entity he or she invests in

- can buy stoc3 in oyota1 but oyota"s managementwon"t pay much attention to my opinions

direct investment is one where the investingcompany creates a new business or gains control

- ,hen 40 bought the whole o2 moco (a U.S. oil company) 1it too3 control o2 the 2irm


9/50

7 - &



a3ing control o2 the business your 2irm willwor3 with may5

- !ecrease operating costs because it results in better coordination

- increase rate o2 technology trans2er because businesses are willing to transfer tech

to units they control


10/50

7 - '(



)ou can enter $oreign mar*ets+it#out control y,

Exporting $ selling your goo!s overseas without setting up aunit abroa! that you control

icensing $ selling others the permission to use your 3nowhow- Franc#ising $ where you provi!e a complete pac3age to allow

others to set up a business li3e yours $ is a 3in! o2 licensing


11/50

7 - ''



.o+ companies ma*e $oreign directinvestments

/c0uisition 5 buying an e6isting company- asy to e6ecute-

ain bran! i!enti2ication an! goo!will- 4est i2 your company is attempting to ac8uire *no+ledge 1uilding a ne+ unit $rom scratc# (9 reen2iel!" investment) 5

- hire or buy local resources

- construct or buy buil!ings- buil! own labor 2orce

:oreign personnel may be !i22icult to hire ;ou control the results


12/50

7 - '2



:oreign !irect investment is correlate! with pro$ita ility .- Companies that !o more 2oreign !irect investment are1

on average1 more pro2itable

,hy+- Create supremacy over other companies in countries o2

interest ( monopoly )- ell more e22iciently

- et to *no+ mar3ets1 resource sources better - :oreign currency may have a high buying power -


13/50

7 - '3



Economists generally $avor $ree $lo+s o$ $oreign direct investment

hey believe 2ree!om 2or := allows business 3now-how to go where it will be most use$ul

- Just as free trade allows people to use skills andresources most efficiently

,e haven"t seen the !ramatic problems 2rom := thatwe"ve seen 2rom the global capital mar3et

7 '4


14/50

7 - '4



rends in FDI

:oreign !irect investment increased in the last >' years n spite o2 !ecline o2 tra!e barriers1 := gre+ even more

rapidly t#an +orld trade because- Businesses feared protectionist pressures- FDI is seen a a way of circumventing trade barriers- Dramatic political and economic changes in many parts of

the world encouraged investment- Globalization of the world economy created firms who see

the entire world as their market

7 '5


15/50

7 - '5



1 #e FDI lump

4etween >''' an! >''? the value o2 := declined almost@'A 2rom B&.> trillion to about B%>' billion

he slow!own in := 2lows was most pronounce! in!evelope! nations

hen := increase! !ramatically >''@->''7- n! slowe! ra!ically in >'' -&'

7 '6


16/50

7 - '6



rends In FDI

:igure 7.&5 := ut2lows &D >->''% (B billions)

7 '7


17/50

7 - '7



#e Direction o$ FDI

*istorically1 most := was !irecte! at the developed nations

- advanced countries invested in other markets

- The ! has been the favorite target for FDI inflows

,hile !evelope! nations still account 2or the largestshare o2 := in2lows1 FDI into developing nations#as increased

- "ost recent inflows into developing nations have beentargeted at the emerging economies of !outh# $ast#and !outheast %sia

- Flows to %frica are growing# especially from &hina

7 '!


18/50

7 - !



Foreign Direct Investment in t#e"orld Economy

he $lo+ o2 := re2ers to the amount o2 :=un!erta3en over a given time perio!

he stoc* o2 := re2ers to the total accumulate!value o2 2oreign owne! assts at a given time

7 '&


19/50

7 - &



#e Direction 8$ FDI

:igure 7.E5 := n2lows by Fegion (B billion)1 &DD@->''%

7 2(


20/50

7 - 2(



#e Direction 8$ FDI:igure 7.?5 nwar! := as a A o2

ross :i6e! Capital :ormation &DD>->''@

7 - 2'


21/50

7 - 2



9 ross 2i6e! capital 2ormation" is the total amount o2investment in 2actories1 stores1 o22ice buil!ings1 an! the li3e

7 - 22


22/50

7 22



#e ource o$ FDI

7 - 23


23/50

7 23



#e #i$t to ervices

s#i$t to services is being !riven by 2our 2actors- In many developed economies# services make up growing

portions of G'I- "any services cannot be traded internationally- "any countries have liberalized their regimes governing

FDI in services- The rise of Internet-based global telecommunications

networks has allowed some service enterprises to relocatesome of their value creation activities to different nations totake advantage of favorable factor costs

7 - 24


24/50

7 24



Decision 9a*ing rid For FDI

7 - 25


25/50

7 25



7 - 26


26/50

7 26



Political Ideology and FDI

:adical;ie+

Pragmatic


27/50



#e :adical ;ie+


28/50



#e :adical ;ie+

4y the en! o2 the &D 's ra!ical view was in retreat- &ollapse of communism

- Bad economic performance of countries that embraced theradical view- !trong economic performance of some countries who

embraced capitalism rather than the radical view

7 - 2&


29/50



#e Free 9ar*et ;ie+

ations specialiGe in goo!s an! services that they can pro!uce most e22iciently

Fesource trans2ers bene2it an! strengthen the hostcountry

0ositive changes in laws an! growth o2 bilateralagreements attest to strength o2 2ree mar3et view

4ut all countries impose some restrictions on FDI

7 - 3(


30/50

(



Pragmatic


31/50



7 - 32


32/50



=osts o$ FDI to t#e.ome =ountry

Can !rive out local competitors or prevent their!evelopment

0ro2its brought home 9hurt" (!ebit) a host"s capitalaccount 0arts importe! 2or assembly hurt tra!e balance Can a22ect sovereignty an! national !e2ense

7 - 33


33/50




34/50



#e ric#est countries all practice aasically $ree mar*et approac#

hey have an association1 the 8rgani>ation $or Economic=ooperation and Development that re0uires members toopen their mar3ets to 2oreign !irect investment

7 - 35


35/50



7 - 36


36/50



7 - 37


37/50



7 - 3!


38/50



#e 1ene$its o$ FDI to.ost =ountries

:our main bene2its o2 := 2or a host country- .esource-transfer effect- $mployment effect- Balance-of-/ayments effect- $ffect on competition and economic growth

n a 2ree mar3et view- "any economists argue that the benefits of FDI so outweigh the

costs associated with pragmatic nationalism that it is misguided- The best policy would be for countries to forgo all intervention in

an "'$,s investment decisions

7 - 3&


39/50



7 - 4(


40/50



?.ori>ontal@ FDI

*oriGontal =irect nvestment- FDI in the same industry abroad as company operates at

home

:= is e6pensive because a 2irm must bear the costs o2establishing pro!uction 2acilities in a 2oreign countryor o2 ac8uiring a 2oreign enterprise

:= is ris3y because o2 the problems associate! with!oing business in another culture where the rules o2the game may be !i22erent

7 - 4'


41/50



?.ori>ontal@ FDI "#en

ransportation costs 2or a pro!uct are high


42/50



7 - 43


43/50



7 - 44


44/50



7 - 45


45/50



n2o on sli!es below here is not re8uire!

7 - 46


46/50



;ertical FDI

Jertical := ta3es two 2orms- Backward vertical FDI is an investment in an industry

abroad that provides inputs for a firm,s domesticproduction processes

- Forward vertical FDI occurs when an industry abroadsells the outputs of a firm,s domestic productionprocesses# this is less common than backward vertical

FDI

7 - 47


47/50



trategic 1e#avior

ne e6planation 2or 2irm"s choice o2 vertical := isthat by using vertical bac3war! integration1 a 2irm cangain control over the source o2 raw materials

- This would allow the firm to raise entry barriers and shutnew competitors out of an industry

nother e6planation o2 vertical := is that 2irms usethis strategy to circumvent the barriers establishe! by2irms alrea!y !oing business in a country

7 - 4!


48/50



9ar*et Imper$ections

he mar3et imper2ections approach o22ers twoe6planations 2or vertical :=

- There are impediments to the sale of know-how throughthe market mechanism

- Investments in specialized assets e(pose the investing firmto hazards that can be reduced only through vertical FDI

7 - 4&


49/50



ross =apital Fixed Formation

7 - 5(


50/50

9ar*et Imper$ections

rw fdi chapter 07

Documents